UCB+UGBA102B+03+Pricing+_+Relevant+Cost+Analysis

UCB+UGBA102B+03+Pricing+_+Relevant+Cost+Analysis -...

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Short-Term Decisions: Pricing & Relevant Cost Analysis UGBA102B Introduction to Managerial Accounting
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UGBA102B Dennis Geyer 2 Relevant Cost Analysis Underlying Assumptions: Underlying Assumptions: Applies to single-period decisions Focuses on revenue & expense differences Ignores the time value of money
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UGBA102B Dennis Geyer 3 Useful Cost Concepts Incremental cost Incremental cost is a future change in cost incurred by following a particular course of action. Sunk cost Sunk cost is a cost that has already been incurred and cannot be avoided. Opportunity cost Opportunity cost is the potential benefit foregone by not following a particular course of action.
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UGBA102B Dennis Geyer 4 Steps in Relevant Cost Analysis 1. Identify decision alternatives. 2. Determine relevant factors. 3. Calculate potential benefits. 4. Calculate potential costs. 5. Make recommendation.
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UGBA102B Dennis Geyer 5 Product Segment Decision E13-2 Regal Cycle Company Total Dirt Bikes Mountain Bikes Racing Bikes Sales 300,000 $ 90,000 $ 150,000 $ 60,000 $ Variable manufacturing & selling 120,000 $ 27,000 $ 60,000 $ 33,000 $ Contribution margin 180,000 $ 63,000 $ 90,000 $ 27,000 $ Less fixed expenses: - $ Advertising, traceable 30,000 $ 10,000 $ 14,000 $ 6,000 $ Depreciation, special equipment 23,000 $ 6,000 $ 9,000 $ 8,000 $ Salaries, product-line managers 35,000 $ 12,000 $ 13,000 $ 10,000 $ Allocated common fixed expenses 60,000 $ 18,000 $ 30,000 $ 12,000 $ Total fixed expenses 148,000 $ 46,000 $ 66,000 $ 36,000 $ Net operating income 32,000 $ 17,000 $ 24,000 $ (9,000) $
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UGBA102B Dennis Geyer 6 Product Segment Decision ALTERNATIVES Drop Racing Bikes Keep Racing Bikes Special equipment has no resale value Common fixed expenses allocated based on $ sales
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UGBA102B Dennis Geyer 7 Keep or Drop ? Assume: Drop Racing Bikes BENEFITS Avoided fixed costs: Advertising, traceable 6,000 $ Salaries, product-line managers 10,000 $ Total benefits 16,000 $ COSTS Lost contribution margin 27,000 $ NET GAIN (LOSS) (11,000) $ Recommend: Keep Racing Bikes
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UGBA102B Dennis Geyer 8 Outsourcing Decision E13-3 Troy Engines, Ltd. Per Unit 15,000 Units per Year Direct materials 14 $ 210,000 $ Direct labor 10 $ 150,000 $ Variable manufacturing overhead 3 $ 45,000 $ Fixed manufacturing overhead, traceable* 6 $ 90,000 $ Fixed manufacturing overhead, allocated 9 $ 135,000 $ Total cost 42 $ 630,000 $ * Comprises Supervisory salaries ($30,000) & Special equipment with no resale value ($60,000)
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UGBA102B Dennis Geyer 9
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